Equity Market Reactions for Targets
Relatively few deals make money for the bidding company’s shareholders. The market rather consistently shows that bidding companies lose money for their shareholders, or at best break even around the time of the announcement of a takeover, whereas target companies attract offer premiums that typically range from 20% to 40%. Stock prices often rise above the offer price if a competing bidder is anticipated.
These returns are relatively consistent in the United States and the United Kingdom, with the data for other countries less clear but indicating similar results. When the bidder and target returns are combined, the overall shareholder wealth effects are typically found to be insignificant over the short term and positive over the longer term.
In the absence of a competing bid, when a takeover is announced the target company’s stock price typically rises to a level below the offer price, but slowly rises to approach the bid price as time approaches the closing date when the final deal is consummated, which for most deals is 3–6 months after the announcement date (Figure 1). This is because there is some risk that the deal will not go through or will be repriced (usually lower) because of negative information that the bidder finds while conducting due diligence on the target (see Due Diligence Requirements in Financial Transactions for a discussion of the best ways to conduct due diligence in M&A deals).